The fiscal context

A key factor that explains variation in government health spending is the variation in the fiscal context. The fiscal context refers to a government’s current and expected future capacity to spend. Global evidence (Schieber and Maeda 1997; Gottret and Schieber 2006) indicates that richer countries tend to be more effective at mobilizing tax revenues (relative to the size of their economies). As incomes increase, national economies tend to become more formalized and urban, and as a result tax collection becomes easier. In turn, this means that richer countries tend to have higher levels of public spending as a share of GDP than do poorer countries. This relationship between national income and fiscal capacity applies to the CE/EECCA countries as well, as reflected in Fig. 3.4, using data for 2006.³⁶ The data reveal, however, substantial variation around the general pattern. Thus, with very similar levels of per capita GDP in Hungary and Estonia, total public spending in Hungary was nearly 18 percentage points greater. Similarly, public spending in Belarus was approximately 2.1 times greater than in Kazakhstan (47% compared with 22%

36 We use total public spending as a percentage of GDP as a proxy for fiscal context because of its relevance and the availability of data on this indicator. Of course, the real fiscal context includes public revenues as well. By only using expenditures, we assume that public expenditure must be in line with public revenue, and that this figure accurately reflects a government’s capacity to spend. To the extent that this is not true in practice (for example, if a government is running a large fiscal deficit), the analysis of expenditure patterns in one year may be misleading. While the accounting identity remains true (public spending as a percentage of GDP multiplied by health as a percentage of total public spending equals government health spending as a percentage of GDP), care must be taken in drawing country-specific conclusions about the ability of a government to sustain higher levels of health spending based on one year’s fiscal expenditure data. While public expenditure levels are indeed a useful proxy measure of fiscal capacity – and we are comfortable using this for the international comparisons shown here – country-specific analysis requires additional, country-specific data to draw more informed conclusions about the fiscal context.

of GDP). Therefore, while it is important to understand the overall pattern, it is essential to dig deeper than simply looking at GDP as a determinant of health spending patterns; it is necessary to understand the specific fiscal context of each country.

As noted in Chapter 2, the early transition period brought with it not only social and economic disruption but fiscal disruption as well. The magnitude of this decline varied across countries. By 1995, the 15 successor countries of the USSR saw their total public revenues fall to an average of 25% of GDP, relative to an estimated 41% in 1989. Within this was huge variation, with the near collapse of the public sector in Georgia reflected in a level of only 5% of GDP in 1995, and a “non-transition” experience for Belarus, showing only a slight improvement in revenues as a share of GDP (Cheasty 1996). In the span of just a few years, the countries diverged greatly in their fiscal contexts, with those of the Caucasus and central Asia (and the Republic of Moldova) being the most severely affected. The CE countries experienced a decline on average, but to a much less severe extent, apart from those experiencing civil conflict (namely, many of the countries that were formerly part of Yugoslavia, except for Slovenia). Rapid recoveries took place in the Czech Republic, Hungary, Poland, Romania and Slovenia. More recent patterns showing figures for 1997, 2001 and 2006 are shown in Fig. 3.5.

60

Total public spending as a % of GDP

5 000 10 000 15 000 20 000 25 000

0

R = 0.25²

GDP per capita, PPP $ RS

Fig. 3.4 Relation between “fiscal capacity” and gross domestic product (GDP) per capita, 2006

Source: WHO 2009b

Notes: AL: Albania; AM: Armenia; AZ: Azerbaijan; BA: Bosnia and Herzegovina; BG: Bulgaria; BY: Belarus; CZ: Czech Republic; EE: Estonia; GE: Georgia; HR: Croatia; HU: Hungary; KG: Kyrgyzstan; KZ: Kazakhstan; LT: Lithuania; LV:

Latvia; MD: the Republic of Moldova; ME: Montenegro; MK: TFYR Macedonia; PL: Poland; RO: Romania; RS: Serbia;

RU: Russian Federation; SI: Slovenia; SK: Slovakia; TJ: Tajikistan; UA: Ukraine; UZ: Uzbekistan.

Comparing this ranking of fiscal capacity with government health spending as shown in Fig. 3.3, it is apparent that more limited fiscal space is associated with low government spending on health. Out of the five countries with the lowest overall government spending, four were also the lowest in terms of government health spending as share of GDP (Azerbaijan, Tajikistan, Armenia and Kazakhstan). Similarly, among the high spenders, each of the governments whose health spending was 6% or more of GDP in 2006 had overall government spending levels greater than 40% of GDP.

Significant decline in fiscal space has often been associated with a commensurate decline in government health spending. In Fig. 3.5, for example, fiscal space in the Russian Federation and Uzbekistan (as a percentage of GDP) has shrunk rapidly, and over the full period this has been associated with a decline in government health spending as a percentage of GDP. In Lithuania, however, there was a steep drop in overall public spending but little change in government health spending, and similarly in Croatia total public spending declined between 2001 and 2006 but health spending levels did not change. Alternatively, some countries that experienced fiscal expansion, such as Azerbaijan and Romania, saw little or no growth in government spending on health as a share of GDP.

Albania Bulgaria Croatia Czech Republic Hungary

TFYR Macedonia Poland RomaniaSlovakia SloveniaSerbia

Armenia Azerbaijan BelarusGeorgia

Kazakhstan Kyrgyzstan Republic of MoldovaRussian Federation

Tajikistan Ukraine

Uzbekistan Estonia Latvia

Lithuania

60

0

Bosnia and Herzegovina Montenegro

2001

1997 2006

50

40

30

20

10

Fig. 3.5 Total government spending as a percentage of gross domestic product (GDP):

1997, 2001, 2006 Source: WHO 2009a.

These data demonstrate that changes in fiscal capacity only explain part of the story, and differences in the priority that governments accorded to health sector allocations must be considered.